Is AIFMD National Private Placement Regime Still Worth It in 2024
- National private placement regimes in Europe were designed as safe harbour rules or exemptions to the concept of public offer. Provided that foreign fund managers respected the conditions of these local regimes, related approaches to investors did qualify as exemptions. These regimes have changed with the introduction of AIFMD and became even stricter with AIFMD II.
- AIFMD introduced a public element in local national private placement regimes. It is now required that the fund offering documentation is registered with local regulators, certain disclosures are included and the main objective preconditions to the AIFMD national private placement regime are complied with.
- AIFMD II has been just published and it comes with a tighter regime for the AIFMD national private placement regime. One of the objective preconditions to the AIFMD national private placement regime has been amended and a new objective precondition has been introduced. As a consequence of the new requirements, the appeal of non-European funds could be severely affected with European investors.
At some point in your journey to establish an investment fund in Europe, you may wonder whether it would make better sense to raise capital from European investors using your US offshore funds, for instance, rather than setting up from scratch an investment fund in Europe.
Non-European funds can be marketed to professional investors in Europe subject to an authorisation process carried out with local supervisory authorities in each target member state. The process is governed by the national laws of each individual member state and gives access only to investors resident or domiciled in that member state.
What Changed for National Private Placement Regimes under AIFMD
National private placement regimes historically consisted of a set of safe harbour rules and exemptions from the requirement to register an offer of investment funds with a local regulator in Europe. It was called private for there being no involvement of local authorities. As part of the criteria, the offer had to have a certain minimum size per investor, a set number of investors were to be approached and they had to be of a specific type – most usually professional or high net worth individuals. A combination of these criteria would allow qualification to exempted status for the offer, depending on the European member state at issue.
National private placement regimes were significantly revamped with the introduction of the Alternative Investment Fund Managers Directive (AIFMD). With the advent of AIFMD, national supervisory authorities changed their approach and became involved in the process of granting marketing authorisations under local national private placement regimes. To a different extent depending on the degree of protectionism adopted for each relevant market. They introduced a public element in the equation. Whilst the authorities of some European member states require a mere notification of the intention to offer non-European alternative investment funds (AIFs) under AIFMD national private placement regime, some others – the ones more protectionist of their markets – require something akin to an ex-novo local authorisation process.
Offering AIFs under AIFMD national private placement regime requires now that at least an application form is filled and submitted with the relevant local authority as well as a fee for the notification is paid. Also, it requires that certain disclosures are made both in the offering documents and the annual reports as well as ongoing reporting is made to local authorities. AIFMD introduced also other preconditions on local private placement regimes in addition to the disclosure requirements. Before applying to offer AIFs under AIFMD national private placement regime in European member states, non-European AIFMs – also called third country in jargon – will have to ensure compliance with these preconditions. These are objective in nature because they pertain mostly to the jurisdiction where the non-European AIFM and AIF are established. Under the current version of AIFMD these objective preconditions are as follows:
- Cooperation – Cooperation agreements, executed in line with the standard set by ESMA, need to be in place between the EEA state in which the AIF is marketed and, respectively, the regulatory authority of the non-EU AIFM and AIF. Such agreements are related to the sharing of information and cross-border supervision of AIFs.
- Non-FATF – Both the non-EU AIFM and non-EU AIF need to be established in a country which is not listed as non-cooperative country and territory by the Financial Action Task Force on anti-money laundering and terrorist financing.
What is About to Change Again for AIFMD National Private Placement Regime
Changes to the existing framework for AIFMD national private placement regime are contained in the now published proposal for a second version of the AIFMD directive. These changes have been structured at different levels, with some of them having in principle the highest potential to disrupt access to European markets for non-European managers and AIFs. Access to European investors using non-EU AIFs becomes potentially also more uncertain under the redesigned AIFMD national private placement regime. A new objective precondition has been introduced under the existing related provisions.
AIFMD II changes the current spectrum of the objective preconditions by replacing the reference to the FATF list of Non-Cooperative Country and Territory with the reference to high-risk third country under article 9.2 of Directive 2015/849. Also, a new objective precondition is introduced. Non-EU AIFs will also have to be established in a third country not listed under Annex I to the Council conclusions of 2020 on the revised EU list of non-cooperative jurisdictions for tax purposes.
Of course, it is very fresh in the collective memory how, even though for a fleeting moment, in the recent past the Cayman Islands went on the list of non-cooperative jurisdictions for tax purposes. Whilst we can only speculate that this will be the case in the future again, we have nevertheless a precedent set. Updates to the EU list of non-cooperative jurisdictions for tax purposes should be done no more than twice a year. Accordingly, the new objective precondition under AIFMD II introduces a moving target within the ecosystem for AIFMD national private placement regime, with potential implications at various levels.
AIFMD II will become applicable sometime in 2025. There is still time before these changes will be of real concern to non-European AIFM interested in raising capital from European investors. However, the risk is clearly there that the perception of non-European investment funds will turn for the worse with European investors. Not to mention that the route of the this regime comes already with its own inherent challenges, which will only increase in the future. Whilst the AIFMD national private placement regime introduced some blanket preconditions, there are additional rules in certain European member states.
Also – and to the contrary of the marketing passport that is granted only to investment funds established in Europe, the route of the AIFMD national private placement regime tends to be more costly, because a separate application is required in each member state where non-European investment funds are intended to be offered. The arguments in support of AIFMD national private placement regime being still worth it in 2024 are clearly less than ever.